CBN initiates move to stop banks from utilising Naira devaluation gains

Deposit money banks (DMBs) have been directed by the Central Bank of Nigeria to stop utilising gains from the revaluation of the Naira to pay dividends or finance operations.

In a letter titled: ‘Impact of Recent FX Policy Reforms: Prudential Guidance to the Banking Sector’, which was dated September 11, 2023, and signed by Haruna Mustafa, CBN’s director of the banking supervision department, the apex bank noted that DMBs are in a position to profit from the review of the foreign exchange (FX) regime because of its potential to significantly increase the Naira value of banks’ foreign currency (FCY) assets and liabilities.

CBN also issued guidelines on how banks can manage the impact of FX reform. The letter read; 

“Additional implications of the FX policy reforms may include breaches of single obligor and net open position limits, possible increase in asset quality risks, and pressure on industry capital adequacy.

“Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilize such FX revaluation gains to pay dividends or meet operating expenses.

“Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor – Limit (SOL) due to the FX policy will be granted forbearance upon application to the CB. The forbearance shall apply only to existing facilities as at the effective date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.

“Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application to the CBN.

“Existing prudential regulations on capital adequacy, dividend payments and FCY borrowing limits shall continue to apply.”